Plastics manufacturing, as a mature industry, closely tracks the overall economic output measured by gross domestic product (GDP). However, recent macroeconomic data has presented mixed signals, with high inflation but resilient consumption, despite higher borrowing costs. While the labor market has remained robust, a downward trend in job openings since March 2022 suggests a weakening ahead.
By Perc Pineda, PhD
PLASTICS Chief Economist
Plastics manufacturing, as a mature industry, closely tracks the overall economic output measured by gross domestic product (GDP). However, recent macroeconomic data has presented mixed signals, with high inflation but resilient consumption, despite higher borrowing costs. While the labor market has remained robust, a downward trend in job openings since March 2022 suggests a weakening ahead.
Capacity utilization rate adjusts to changing economic outlook
One valuable metric for monitoring industry activity is capacity utilization, which measures the extent to which manufacturing and production capabilities are being utilized. By examining the Federal Reserve Board’s capacity utilization estimates for plastics and rubber products manufacturing, we can see a strong correlation evident between this metric and quarterly real GDP growth.
Historical data reveals that the lowest capacity utilization in plastics and rubber product manufacturing occurred in April 2009, during a recession, at 56.9%. It reached its peak at 86.9% in December 2018 before dropping to 66.0% in April 2020 amid the COVID-19 recession. Subsequently, it increased to 85.6% in January 2021 but has since trended downward to 78.0% in May, which is lower than the 84.0% recorded a year earlier.
Analyzing the correlation and proportion of variation
When comparing the changes in capacity utilization to real GDP growth, a correlation coefficient of 0.75 is observed based on data from Q1 1980 to Q1 2023. The commonly used interpretation of correlation suggests that it can be squared to determine the proportion of variation in capacity utilization may be explained by changes in the economy’s output – not to establish a causal relationship. In this case, approximately 56% (0.75 squared) of the variation in capacity utilization can be attributed to changes in the economy’s output.
What can be expected for the remainder of 2023?
Looking ahead to the remaining months of 2023, the economy is expected to continue experiencing a low-growth environment according to the latest Plastics Quarterly forecast. Consequently, the plastics industry will undergo adjustments that reflect the overall macroeconomic activity. This could result in a slowdown in plastic products manufacturing and a lower rate of capacity utilization. However, it is unlikely to lead to a collapse in plastics demand due to their significant presence in final consumption. Instead, there may be an adjustment in production as the inventory turnover rate slows at different distribution channels within the plastics end markets.
